Carbon pricing

Imposing a price on carbon is intended to raise the cost of activities which create CO2 emissions and thus encourage alternative activities with lower emissions. For example if generating electricity from unabated combustion of fossil fuels becomes more expensive then using fossil fuels with Carbon Capture and Storage may become financially more competitive and lead to industry voluntarily investing in the equipment to remove CO2 from existing power stations, and other CO2-emitting processes such as cement, steel and glass production.

Carbon pricing is an alternative mechanism to subsidising low-carbon technologies or enacting laws banning CO2 emissions, or banning the use of certain technologies and/or mandating others. Economists generally consider that carbon pricing works better than subsidies or mandates as the main way of achieving changes in emissions, with the other methods being more appropriate for making smaller adjustments to the market e.g. to encourage development of newer technologies.[1]
Heavy reliance on mandates or subsidies rather than carbon pricing can have the perverse effect of increasing the cost of solutions whilst reducing the economic incentive to develop cheaper options.[2]

The IPCC regards carbon pricing as a necessary part of AGW mitigation efforts.[3]

Morally, carbon pricing can be regarded as the just approach, making the polluter pay for creating pollution whose costs would otherwise fall on society as whole. In economics terms the costs of pollution which are not paid for by the polluter are regarded as external costs (or just externalities) and the burden of these costs falling on society as a whole rather than the polluter are seen as a market failure. Pricing internalises these costs and corrects for the failure of the market.

The fossil fuel industries generally back carbon pricing[4]
whether through principle, or as the lesser or what they see as worse alternatives.[5]

Pricing can also reward external benefits such as carbon sequestration through rewilding, reforestation and other Carbon Dioxide Reduction schemes. This could be achieved either in a purely economic scheme of carbon taxation, with CDR attracting negative rates of tax, or by using revenues from carbon pricing to fund selected schemes, as in Colombia and Costa Rica.[6]

Pricing at source v. destination

Pricing can be done by either adding a price, e.g. through taxation, at source on carbon-emitting fuels, or by charging for carbon emissions. There are relatively few large sources of carbon-emitting fuels – a few thousand coal, oil and gas companies worldwide – but there are billions of emitters, including not only large power stations and industries but all internal combustion engines in ships, planes, cars and motorbikes, so it is practically impossible to apply pricing to all emissions. The European Emissions Trading Scheme covers only large emitters, responsible for less than half the EU's CO2 emissions.[7]
However an emissions pricing scheme such as the EU's ETS can also cover emissions of other greenhouse gases and other pollutants under the same scheme.

Pricing carbon-based fuels at source affects all users of the fuels, so is more likely to encourage individuals to reduce usage or switch to lower-carbon alternatives such as more fuel-efficient or electric vehicles. However by increasing the cost of fuels it does also have a social cost, hitting poorer people, for whom fuel costs tend to be a larger proportion of their budget, hardest. Some advocates of carbon pricing propose compensating those hardest hit, either by direct payments or by corresponding reduction in other taxes which also hit the poorest hardest, such as Value Added taxes. Such schems are described as revenue neutral because the government should end up with neither more nor less income from the measure.
In France when a carbon tax was introduced without compensating measures the effect on particularly rural poor people who relied disproportionately on transport resulted in civil unrest which was manifested in the gilets jaunes movement.

Economist Tim Harford describes the benefit of a carbon taxation (pricing at source) system by supposing that a conscientious consumer wishes to minimise their carbon footprint. They would have to gather data on every part of the production chain for everything they consider buying in order to make informed choices. However carbon pricing, by reflecting the CO2 emissions embedded in goods and services in their prices, achieves much the same effect without any effort, or indeed desire, on the part of consumers to do the right thing.[8]

Today marks the entering into force of the Paris climate agreement. The agreement is an important step forward by world governments in addressing the serious risks of climate change.

ExxonMobil supports the work of the Paris signatories, acknowledges the ambitious goals of this agreement and believes the company has a constructive role to play in developing solutions.

We have been working for many years to reduce emissions in our operations and provide products that help consumers reduce their emissions.

ExxonMobil continues to pursue technology solutions with leading scientists in industry, academia and nongovernmental institutions. We have invested nearly $7 billion since 2000 on lower-emissions initiatives such as energy efficiency, cogeneration, flare reduction, carbon capture and sequestration and research into next-generation biofuels.

The Paris agreement and the initial Intended Nationally Determined Contributions (INDCs) pledged by its signatories reflect the dual challenge of minimizing greenhouse gas emissions while ensuring the world has adequate access to affordable and reliable supplies of energy.

These INDCs also reflect understanding that all economic energy sources will be necessary to meet growing global demand, and that the evolution of the energy system toward lower atmospheric emissions will take time and commitment due to its enormous scale, capital intensity and complexity.

As policymakers develop mechanisms to meet the Paris goals, ExxonMobil encourages them to focus on reducing emissions at the lowest cost to society, keeping in mind that access to affordable and reliable energy is critical to economic growth and improved standards of living worldwide.

The best policy options to achieve that goal will be market-based, predictable, transparent and globally applicable to promote innovation and technology breakthroughs required to address climate change risks. ExxonMobil has for many years held the view that a revenue-neutral carbon tax is the best option to fulfill these key principles.

Carbon Tax v Green Nudge

Nudging out support for a carbon tax
by David Hagmann, Emily H Ho, George Loewenstein
in Nature Climate Change
on 13 May 2019
[article]

A carbon tax is widely accepted as the most effective policy for curbing carbon emissions but is controversial because it imposes costs on consumers. An alternative, ‘nudge,’ approach promises smaller benefits but with much lower costs. However, nudges aimed at reducing carbon emissions could have a pernicious indirect effect if they offer the promise of a ‘quick fix’ and thereby undermine support for policies of greater impact. Across six experiments, including one conducted with individuals involved in policymaking, we show that introducing a green energy default nudge diminishes support for a carbon tax. We propose that nudges decrease support for substantive policies by providing false hope that problems can be tackled without imposing considerable costs. Consistent with this account, we show that by minimizing the perceived economic cost of the tax and disclosing the small impact of the nudge, eliminates crowding-out without diminishing support for the nudge.

Canada

Albertans will pay $3 billion more annually in a new economywide tax on carbon, and will likely have to shell out more for electricity as a result of an accelerated retirement of coal-fired power plants under the NDP government’s new climate-change strategy released Sunday. Premier Rachel Notley said she thinks Alberta families will willingly pay the tax and higher price for power, but some of the tax revenue will be returned to people and businesses that need help. “Low- and middle-income families will get support to help them make ends meet,” she said following the announcement of the long-awaited strategy at the Telus World of Science in Edmonton. “I think that ultimately we’ll be able to manage this in a way that encourages reduced use of high-emission activities, while at the same time ensuring we don’t put an unnecessary burden on families.” The plan predicts the new tax of $20 per tonne in 2017 and $30 per tonne in 2018 will cost the average household $320 annually in 2017 and $470 in 2018. But 60 per cent of Albertans will receive rebates for some or all of the increased cost of home heating, electricity and gasoline.

Canadian Environment and Climate Change Minister Catherine McKenna praised her provincial colleagues for making "amazing" progress on discussions to tackle global warming on Monday, after her government's proposal to make polluters pay drove a few of them out of the room. According to the new federal policy, all Canadian jurisdictions must adopt a carbon pricing scheme by 2018 with a minimum price of $10 per tonne. The price must rise to reach $50 per tonne by 2022.

Trudeau said that the proposed price on carbon pollution would start at 10 Canadian dollars ($7.60) per tonne in 2018, rising by 10 Canadian dollars each year, and hitting 50 Canadian dollars per tonne by 2022.

To begin, we agree that climate change is a serious issue and that reducing greenhouse gas emissions is a sensible objective of public policy.

Second, we agree that the lowest-cost approach for reducing emissions is with carbon pricing. Either economy-wide carbon taxes or cap-and-trade systems reduce GHG emissions at a lower overall economic cost than “command-and-control” government regulations.

Third, we agree that carbon prices cannot do it all; there is a case for “complementary” regulations. The emissions from some economic sectors are difficult to incorporate into a carbon price, and some existing market features weaken the effect of carbon pricing.

On a related point, we also agree that some regulations are bad and should not be used: In particular, inflexible regulations that dictate specific technologies or methods for reducing emissions constrain private choice and increase costs.

Finally, we agree that in order to drive the kinds of emissions cuts deemed necessary over the next half-century, carbon prices will need to rise significantly, likely to $100 a tonne and even higher.

British Columbia’s carbon tax has been in place for six years and all available evidence indicates it has been successful. Per capita fossil fuel combustion is down and the economy has performed well relative to the rest of Canada. The policy has survived two provincial elections and a change in Premier. This backgrounder explores B.C.’s experience with the carbon tax.

B.C.’s carbon tax was implemented with a five-year schedule of rate increases starting at $10 per tonne in 2008, rising by $5 per tonne per year to $30 per tonne in 2012.1 The tax applies to almost all of the fossil fuels burned in the province (e.g., coal, gasoline, natural gas), amounting to over 70 per cent of the province’s carbon pollution. In 2013, the government decided to keep the rate and coverage stable for five years — or until other jurisdictions introduce similar carbon pricing approaches. For the 2013–14 fiscal year, the carbon tax is forecasted to raise $1.2 billion — slightly less than three per cent of total provincial revenue. The Carbon Tax Act requires that money raised by the carbon tax be used to reduce other provincial taxes (referred to as ‘revenue neutrality’). In 2013–14, the largest reduction measures were cutting corporate income taxes ($440 million) and personal income taxes ($237 million) and providing low-income tax credits ($194 million).

California

With China now the largest emitter in the world, and India and other large developing countries not very far behind, California policies that achieve emission reductions through excessively costly means will fail to encourage other countries to follow, or even recognize, California’s leadership. On the other hand, by increasing reliance on its progressive market-based system, California can succeed at home and be influential around the world.

Jerry Taylor, Niskanen Centre

To the casual observer, the American right can appear an undifferentiated wall of denial and obstructionism on climate change, but behind the scenes there are signs of movement. A growing number of conservative leaders and intellectuals have come to terms with climate science and begun casting about for solutions. Led mainly by libertarians and libertarian-leaning economists, they've begun to coalesce behind a carbon tax, which they consider the most market-friendly of the available alternatives.

Costly and economically inefficient command-and-control greenhouse gas regulations are firmly entrenched in law, and there is no plausible scenario in which they can be removed by conservative political force. Even were that not the case, the risks imposed by climate change are real, and a policy of ignoring those risks and hoping for the best is inconsistent with risk management practices conservatives embrace in other, non-climate contexts. Conservatives should embrace a carbon tax (a much less costly means of reducing greenhouse gas emissions) in return for elimination of EPA regulatory authority over greenhouse gas emissions, abolition of green energy subsidies and regulatory mandates, and offsetting tax cuts to provide for revenue neutrality.

Arguments that unilateral action by the United States produces little climate benefit, that a carbon tax will expand the size of government, that a carbon tax is a regressive, that adaptation and geo-engineering is preferable to emissions constraint, that economists cannot confidently design a carbon tax that does more good than harm, that the legislative process cannot deliver a carbon tax worth embracing, and that promoting a carbon tax puts conservatives on a slippery political slope are explored and found wanting.

Citizens' Climate Lobby

To account for the cost of burning fossil fuels, we propose an initial fee of $15/ton on the CO2 equivalent emissions of fossil fuels, escalating $10/ton/year, imposed upstream at the mine, well or port of entry.

Accounting for the true cost of fossil fuel emissions not only creates a level-playing field for all sources of energy, but also informs consumers of the true cost comparison of various fuels when making purchase decisions.

2. Give 100% of the fees minus administrative costs back to households each month.

100% of the net fees from the carbon fee are held in a Carbon Fees Trust fund and returned directly to households as a monthly dividend.

About two-thirds of households will break even or receive more than they would pay in higher prices. This feature will inject billions into the economy, protect family budgets, free households to make independent choices about their energy usage, spur innovation and build aggregate demand for low-carbon products at the consumer level.

3. Use a border adjustment to stop business relocation.

Import fees on products imported from countries without a carbon fee, along with rebates to US industries exporting to those countries, will discourage businesses from relocating where they can emit more CO2 and motivate other countries to adopt similar carbon pricing policies. Building upon existing tax and trade systems will avoid complex new institutional arrangements.

Firms seeking to escape higher energy costs will be discouraged from relocating to non-compliant nations (“leakage”), as their products will be subject to import fees.

How a new climate strategy can strengthen our economy, reduce regulation, help working-class Americans, shrink government & promote national security

Mounting evidence of climate change is growing too strong to ignore. While the extent to which climate change is due to man-made causes can be questioned, the risks associated with future warming are too big and should be hedged. At least we need an insurance policy. For too long, many Republicans have looked the other way, forfeiting the policy initiative to those who favor growth-inhibiting command-and-control regulations, and fostering a needless climate divide between the GOP and the scientific, business, military, religious, civic and international mainstream.

Now that the Republican Party controls the White House and Congress, it has the opportunity and responsibility to promote a climate plan that showcases the full power of enduring conservative convictions. Any climate solution should be based on sound economic analysis and embody the principles of free markets and limited government. As this paper argues, such a plan could strengthen our economy, benefit working-class Americans, reduce regulations, protect our natural heritage and consolidate a new era of Republican leadership. These benefits accrue regardless of one’s views on climate science.

A group of conservative thought leaders1 is bringing forth the pure Fee & Dividend plan. As their report states, fee & dividend is a climate plan that “can strengthen our economy, reduce regulation, help working-class Americans, shrink government and promote national security.”

A group of prominent Republicans released a “conservative” plan to reduce carbon dioxide emissions today, arguing that replacing Obama-era policies with a carbon-tax-and-dividend system would be a politically feasible way to fight off the worst effects of climate change. The plan, released by the Climate Leadership Council in a report titled “The Conservative Case for Carbon Dividends,” would tax carbon beginning at $40 per ton. The price would then rise each year to help push emissions down. The revenues generated—about $194 billion in the first year, rising up past $250 billion within a decade—would then be redistributed by the Social Security Administration in the form of quarterly checks to every U.S. household. Proponents hope that idea would swing public support toward aggressive climate change mitigation.

A group of Republican elder statesmen have recommended that the US adopt a $40/ton carbon tax as the “most efficient and effective way of reducing CO2 emissions”. This post reviews the potential economic impacts of such a tax on the US energy sector. It concludes that the impacts on the oil and natural gas sectors would be comparatively minor but that the impacts on the coal sector would be severe. Electric utilities with a high percentage of coal in their generation mix could well be driven into bankruptcy.

One example of this is the attempt to employ aggressive sector-based targets through technology-driven policies, such as the Low Carbon Fuels Standard (LCFS). In the presence of a binding cap-and-trade regime, the LCFS has the perverse effect of relocating carbon dioxide (CO2) emissions to other sectors but not reducing net emissions, while driving up statewide abatement costs, and suppressing allowance prices in the cap-and-trade market, thereby reducing incentives for technological change. That is bad news all around. These perverse outcomes render such policies of little interest or value to other regions of the world.

The magnitude of the economic distortion is illustrated by the fact that allowances in the California cap-and-trade market have recently been trading in the range of $12 to $13 per ton of CO2, while LCFS credits have traded this summer for about $80 per ton of CO2.

In principle, mechanisms that set a carbon price, including cap and trade systems and carbon taxes, can achieve mitigation in a cost-effective way, but have been implemented with diverse effects due in part to national circumstances as well as policy design. The short-run environmental effects of cap and trade systems have been limited as a result of loose caps or caps that have not proved to be constraining (limited evidence, medium agreement). In some countries, tax-based policies specifically aimed at reducing GHG emissions — alongside technology and other policies — have helped to weaken the link between GHG emissions and gross domestic product (GDP) (high confidence). In addition, in a large group of countries, fuel taxes (although not necessarily designed for the purpose of mitigation) have had effects that are akin to sectoral carbon taxes (robust evidence, medium agreement). Revenues from carbon taxes or auctioned emission allowances are used in some countries to reduce other taxes and/or to provide transfers to low‐income groups. This illustrates the general principle that mitigation policies that raise government revenue generally have lower social costs than approaches which do not.

↑Exxon, BP and Shell back carbon tax proposal to curb emissions
by Oliver Milman
in The Guardian
on 20 Jun 2017
[article]

Oil giants ExxonMobil, Shell, BP and Total are among a group of large corporations supporting a plan to tax carbon dioxide emissions in order to address climate change. The companies have revealed their support for the Climate Leadership Council, a group of senior Republican figures that in February proposed a $40 fee on each ton of CO2 emitted as part of a “free-market, limited government” response to climate change. The fossil fuel companies announced their backing for the plan alongside other major firms including Unilever, PepsiCo, General Motors and Johnson & Johnson. In a full-page newspaper ad on Tuesday, the companies called for a “consensus climate solution that bridges partisan divides, strengthens our economy and protects our shared environment”. Exxon and the others were listed as founding members of the plan, alongside the green groups Conservation International and the Nature Conservancy.

↑Exxon is lobbying for a carbon tax. There is, obviously, a catch.
by Umair Irfan
in Vox
on 18 Oct 2018
[article]

The oil giant wants immunity from lawsuits that would make it pay for the damages of climate change.

Economists and scientists agree that carbon taxes help to reduce greenhouse gas emissions by creating an incentive for people to use less fossil fuels. But that’s not all they can do, as we and our co-authors – ministers from both countries – note in an essay published in the journal Nature.

Carbon taxes are also effective at reducing the greenhouse gas emissions created by the destruction of tropical rainforests, making them even more critical to addressing the climate crisis.

If tropical deforestation were a country, it would be the world’s largest emitter after China and the United States. Moreover, tropical rainforests remove carbon from the atmosphere: The Amazon, for example absorbs five percent of global carbon emissions every year.

This means that when we cut down our rainforests, we also eliminate one of our best tools for addressing the climate crisis.

But in both Colombia and Costa Rica, deforestation rates are down, while revenues to fund forest restoration efforts are up.

The programmes have different structures but similar impacts. Since 1997, Costa Rica’s carbon tax has helped to protect and restore lands across a quarter of the country. It generates $26.5 million in revenue every year, which the government then pays out to farmers and landowners that commit to rainforest protection or restoration on their property.

Meanwhile, Colombia’s programme has generated more than $250 million in revenue over the past three years. More than a quarter of that revenue goes toward environmental causes such as reducing deforestation and monitoring protected areas.

These programmes also offer a counterpoint to the argument that carbon taxes disproportionately impact people with lower incomes.

In Costa Rica, the government helps lower-income residents to complete their applications, and it prioritises lower-income regions when distributing payments. As a result, two out of every five people who receive a payment from the programme live below the poverty line.

We wanted to see what would happen if other countries adopted similar policies, so we analysed their potential impact on 12 countries with tropical rainforests across Africa, Asia and South America.

Our model found that if all 12 countries adopted a policy like Colombia’s, these countries would collectively generate $1.8 billion every year. If they decided to adopt an even more ambitious proposal in the face of increasing global emissions, their revenue would soar to nearly $13 billion — equivalent to the GDP of Nicaragua.

Either scenario would have a profound impact on protection and restoration efforts. Countries facing the biggest threats from deforestation, like Indonesia, would have robust funding streams to help restore devastated landscapes.

Other countries, like Mexico and Malaysia, would be able to better monitor their protected areas. And every country would reduce the public’s reliance on fossil fuels.

Our research shows that a carbon tax is one of the most effective investments a country can make, and a particularly easy initiative for countries with existing carbon offset programs like Peru and Ecuador.

It offers a powerful tool for governments to fight deforestation, reduce emissions and support rural communities. Governments should consider it, and international institutions should encourage it.

Colombia and Costa Rica have blazed a trail. Since 1997, Costa Rica has collected a 3.5% tax on fossil fuels. That now generates $26.5 million per year7 (see go.nature.com/3jdpmtk; in Spanish). The tax was negotiated in Costa Rica’s legislative assembly and supported by research from the non-governmental Tropical Science Center in San José, which examined the benefits of forests to the country’s economy. Implementation faced little opposition because the tax was incorporated with other fiscal reforms. Surveys of fossil-fuel users indicated that they did not object if revenues were directed to forest conservation.

To invest the money raised, Costa Rica created its National Forest Fund (FONAFIFO). For example, from 1997 to 2018, the fund paid out to landowners across 23.5% of the country — an area of 1.2 million hectares. They spent the money on projects to protect 1 million hectares of mature forest and 71,000 hectares under reforestation. The fund supports conservation of mature forests, reforestation using native or exotic species, and agroforestry systems that use a mix of trees and crops or grasslands. It has disbursed $500 million to roughly 18,000 people, including those living across 162,000 hectares of Indigenous lands, such as the Cabécar and Bribri territories. Transparency and accountability of the fund’s operations are important to its success and continued popularity, so strategic and operational plans, budgets, financial statements and other details are available online (see www.fonafifo.go.cr).

In the 1980s, Costa Rica had the highest deforestation rates in the world. Forest cover more than doubled between 1986 and 2013, rising to 53%8. Although estimates remain uncertain, we think that the fossil-fuel tax, along with a decline in the profitability of livestock and the expansion of protected areas and ecotourism, contributed to this. The programme funded by the fuel tax has been especially effective away from protected areas and their buffer zones.

Colombia rolled out a carbon tax in 2016 as part of sweeping fiscal reforms. These garnered broad political support because of the need to raise money for the country’s peace process. The carbon tax was developed by the Ministry of Finance and Ministry of Environment and Sustainable Development, and is collected from companies producing or importing fossil fuels.

Colombia’s tax of $5 per tonne of emitted carbon yielded revenues of $148 million in 2017 and $91 million in 2018 (see go.nature.com/3b8ufkj; in Spanish). These go to the Colombian Peace Fund (Fondo Colombia en Paz), from which 25% is used to manage coastal erosion, reduce and monitor deforestation, conserve water sources, protect strategic ecosystems and combat climate change. A further 5% is used to strengthen Colombia’s National System of Protected Areas. The revenue will be used for conservation projects in the following prioritized areas: flood-plain forests, tropical montane cloud forests, tropical humid forests, tropical savannahs and Andean forests. These projects are in the development phase and are waiting to access the fund. There is also a project to enhance the Colombian Environmental Information System (SIAC), a web-based platform that provides official information on the state of the country’s natural resources and which is under development (see go.nature.com/2hthzqw; in Spanish).

A mechanism called carbon neutrality allows companies to reduce their tax burdens by buying certified carbon credits from conservation and restoration projects in Colombia that adhere to internationally recognized standards. For example, a company might buy a credit in a region that promotes social initiatives with communities that are involved in managing these projects. This is the case for communities in the Chocó departmental region of northwestern Colombia, such as those living near towns including Acandí, El Carmen del Darién and Baudó.

↑What is the EU emission trading scheme?
by the European Environment Agency
[website]